Europe in the TimeEurope of Covid-19 There is no doubt that the Covid-19 crisis represents a challenge for European unity and another crash test for the euro. Europe has been, Europe in the Time of and will likely remain, one of the most Covid-infected regions in the world and, while doing nothing was not an option and would itself have disrupted economic activity, the forceful reactions of national Covid-19 governments to the pandemic, through various strategies combining social distancing, testing/quarantining and lockdowns, have triggered an economic crisis at least twice the size of the 2009 crisis. Furthermore, the recovery is likely to be slow due to depressed consumption and Edited by Agnès Bénassy-Quéré investment, and it will require fast reallocations in both the labour market and the capital market. and Beatrice Weder di Mauro A small positive observation in this crisis has been the degree of engagement of economists in an intense debate with policymakers on the appropriate responses to ‘flatten the economic recession curve’ and to safeguard the most impacted groups from the economic fallout of the health crisis. This eBook is an illustration of the intense effort of the academic community during this time. In a selection of columns, analysis and policy proposals that were published on VoxEU between the end of March and the middle of May 2020 it provides a remarkable example of the response of economists to the unfolding crisis and of the value of VoxEU as the platform for such high quality exchange of views. Within each section, the articles are sorted by their date of appearance, which gives the reader a sense of how the debate progressed over a short period of time. ISBN 978-1-912179-33-6 Centre for Economic Policy Research 33 Great Sutton Street A VoxEU.org Book London EC1V 0DX CEPR Press Tel: +44 (0)20 7183 8801 Email: [email protected] www.cepr.org CEPR Press 9 781912 179336 Europe in the Time of Covid-19 CEPR Press Centre for Economic Policy Research 33 Great Sutton Street London, EC1V 0DX UK Tel: +44 (0)20 7183 8801 Email: [email protected] Web: www.cepr.org ISBN: 978-1-912179-33-6 Copyright © CEPR Press, 2020. Europe in the Time of Covid-19 Edited by Agnès Bénassy-Quéré and Beatrice Weder di Mauro A CEPR Press VoxEU.org eBook CEPR Press Centre for Economic Policy Research (CEPR) The Centre for Economic Policy Research (CEPR) is a network of over 1,500 research economists based mostly in European universities. The Centre’s goal is twofold: to promote world-class research, and to get the policy-relevant results into the hands of key decision-makers. CEPR’s guiding principle is ‘Research excellence with policy relevance’. A registered charity since it was founded in 1983, CEPR is independent of all public and private interest groups. It takes no institutional stand on economic policy matters and its core funding comes from its Institutional Members and sales of publications. Because it draws on such a large network of researchers, its output reflects a broad spectrum of individual viewpoints as well as perspectives drawn from civil society. CEPR research may include views on policy, but the Trustees of the Centre do not give prior review to its publications. The opinions expressed in this report are those of the authors and not those of CEPR. Chair of the Board Sir Charlie Bean Founder and Honorary President Richard Portes President Beatrice Weder di Mauro Vice Presidents Maristella Botticini Ugo Panizza Philippe Martin Hélène Rey Chief Executive Officer Tessa Ogden Contents Preface ix 1 Europe in the time of Covid-19: A new crash test and a new opportunity 1 Agnès Bénassy-Quéré and Beatrice Weder di Mauro, 19 May 2020 Part I: A Europe that protects? 2 EU solidarity in fighting COVID-19: State of play, obstacles, citizens’ attitudes, and ways forward 21 Anniek de Ruijter, Roel Beetsma, Brian Burgoon, Francesco Nicoli and Frank Vandenbroucke, 26 March 2020 3 The EU needs an independent public health authority to fight pandemics such as the COVID-19 crises 29 Joan Costa-i-Font, 2 April 2020 4 Corporate debt burdens threaten economic recovery after COVID-19: Planning for debt restructuring should start now 35 Bo Becker, Ulrich Hege and Pierre Mella-Barral, 21 March 2020 5 Coronavirus and financial stability 3.0: Try equity – risk sharing for companies, large and small 41 Arnoud Boot, Elena Carletti, Hans-Helmut Kotz, Jan Pieter Krahnen, Loriana Pelizzon and Marti Subrahmanyam, 3 April 2020 6 Corona and Financial Stability 4.0: Implementing a European Pandemic Equity Fund 48 Arnoud Boot, Elena Carletti, Hans-Helmut Kotz, Jan Pieter Krahnen, Loriana Pelizzon, Marti Subrahmanyam, 25 April 2020 7 The European Commission’s SURE initiative and euro area unemployment re-insurance 57 Frank Vandenbroucke, László Andor, Roel Beetsma, Brian Burgoon, Georg Fischer, Theresa Kuhn, Chris Luigjes and Francesco Nicoli, 6 April 2020 8 Immigrant key workers in Europe: The COVID-19 response that comes from abroad 66 Francesco Fasani, 5 May 2020 9 EU state aid policies in the time of COVID-19 73 Massimo Motta and Martin Peitz, 18 April 2020 10 The EU recovery fund: An opportunity for change 78 Massimo Motta and Martin Peitz, 30 April 2020 11 Green bridges: Reconnecting Europe to avoid economic disaster 83 Bary Pradelski and Miquel Oliu-Barton, 30 April 2020 12 European bank regulators aren’t yet doing what it takes 88 Ignazio Angeloni, 24 March 2020 13 The coronavirus shock to financial stability 91 Enrico Perotti, 27 March 2020 14 IFRS 9 and COVID-19: Delay and freeze the transitional arrangements clock 98 Jorge Abad and Javier Suarez, 2 April 2020 15 Unintended effects of loan guarantees during the Covid-19 crisis 104 Giorgio Gobbi, Francesco Palazzo and Anatoli Segura, 15 April 2020 16 COVID-19: Europe needs a catastrophe relief plan 103 Agnès Bénassy-Quéré, Ramon Marimon, Jean Pisani-Ferry, Lucrezia Reichlin, Dirk Schoenmaker and Beatrice Weder di Mauro, 11 March 2020 17 A progressive European wealth tax to fund the European COVID response 113 Camille Landais, Emmanuel Saez and Gabriel Zucman, 3 April 2020 18 EU solidarity in exceptional times: Corona transfers instead of Coronabonds 119 Daniel Gros, 5 April 2020 19 Coronataxes as a solution 123 Timo Löyttyniemi, 30 April 2020 20 A proposal for a Covid Credit Line 129 Agnès Bénassy-Quéré, Arnoud Boot, Antonio Fatás, Marcel Fratzscher, Clemens Fuest, Francesco Giavazzi, Ramon Marimon, Philippe Martin, Jean Pisani-Ferry, Lucrezia Reichlin, Dirk Schoenmaker, Pedro Teles and Beatrice Weder di Mauro, 21 March 2020 21 The ESM can finance the COVID fight now 135 Aitor Erce, Antonio Garcia Pascual and Ramon Marimon, 6 April 2020 22 Maturity, seniority and size: Make sure the ESM’s pandemic crisis support is fit for purpose! 147 Giancarlo Corsetti and Aitor Erce, 29 April 2020 Part II: Breaking funding taboos 23 COVID-19: A euro area safe asset and fiscal capacity are needed now 156 Lorenzo Codogno and Paul van den Noord, 25 March 2020 24 Corona bonds – great idea but complicated in reality 162 Lorenzo Bini Smaghi, 28 March 2020 25 ESM loans or Coronabonds: A legal analysis from the German perspective 167 Julian Pröbstl, 4 April 2020 vi 26 Sharing the fiscal burden of the crisis: A Pandemic Solidarity Instrument for the EU 173 Sebastian Grund, Lucas Guttenberg and Christian Odendahl, 5 April 2020 27 COVID-19 economic crisis: Europe needs more than one instrument 187 Agnès Bénassy-Quéré, Giancarlo Corsetti, Antonio Fatás, Gabriel Felbermayr, Marcel Fratzscher, Clemens Fuest, Francesco Giavazzi, Ramon Marimon, Philippe Martin, Jean Pisani-Ferry, Lucrezia Reichlin, Hélène Rey, Moritz Schularick, Jens Südekum, Pedro Teles, Nicolas Véron and Beatrice Weder di Mauro, 5 April 2020 28 The economic, political and moral case for a European fiscal policy response to COVID-19 194 Thorsten Beck, 7 April 2020 29 Coronabonds: The forgotten history of European Community debt 201 Sebastian Horn, Josefin Meyer and Christoph Trebesch, 15 April 2020 30 Towards a European Reconstruction Fund 207 Luis Garicano, 5 May 2020 31 The EU response to the coronavirus crisis: How to get more bang for the buck 216 Massimo Bordignon and Guido Tabellini, 13 May 2020 32 Perpetual bonds are not the best way to finance the European Recovery Fund 221 Giancarlo Corsetti, Aitor Erce and Antonio Garcia Pascual, 14 May 2020 33 Helicopter money: The time is now 230 Jordi Galí, 17 March 2020 34 Covid Perpetual Eurobonds: Jointly guaranteed and supported by the ECB 235 Francesco Giavazzi and Guido Tabellini, 24 March 2020 35 Breaking the taboo: The political economy of COVID-motivated helicopter drops 240 Eran Yashiv, 26 March 2020 36 COVID-19: OMT is second-best, but still welcome 245 Lorenzo Codogno and Paul van den Noord, 5 April 2020 37 To fight the COVID pandemic, policymakers must move fast and break taboos 250 Sony Kapoor and Willem Buiter, 6 April 2020 38 Make room for fiscal action through debt conversion 255 Vesa Vihriälä, 15 April 2020 vii Preface Agnès Bénassy-Quéré and Beatrice Weder di Mauro Paris School of Economics; Graduate Institute Geneva and CEPR There is no doubt that the Covid crisis represents a challenge for European unity and another crash test for the euro. A small positive observation in this crisis has been the degree of engagement of economists in an intense debate with policymakers on the appropriate responses to ‘flatten the economic recession curve’ and to safeguard the most impacted groups from the economic fallout of the health crisis. A new VoxEU eBook offers an illustration of the intense effort of the academic community.